That's quite odd.
Pastebin your new xorg.conf (to make sure you've got it right) and conf snippets from /usr/share/X11/xorg.conf.d (if you modified any of them).
But I think I've seen a different thread of yours about udev upgrade - this just might play a role here; if udev got messed up, input hotplug in X won't work properly (if at all).

Its like the touchpad is taking over all the ports and not letting the mouse see anything at all. I think its going to be something silly.

I have done a complete world update too - everything went fine apart from the last package which was gnome-power-manager which I cant get to install at all. I have also switched to gcc4.6 and compiled everything from within that profile. I am on 3.3 gentoo kernel too and getting stuck with this.

I tried livecd too and the mouse works fine on livecd, so it has to be something to do with configuration on here somewhere._________________It said "Requires Windows XP or better"
So I installed gentoo.

Cheers Already tried this but everything seems fine. All the USB drivers are in there, evdev, tmpfs, devtmp etc.

This is almost like evdev is not seeing the device at all. Or rather in console it is fine, but in gdm and X there is nothing. If I try and force it to reference the /dev device for it, it will come back with an ioctl error saying its an invalid device and then evdev unloads.

I only started having this problem when I switched on hotplug and started to use evdev. I have tried using udev to specify the USB device but that does not seem to work either. I am totally stuck with this, and my next steps are going to change the kernel again to see if that fixes the issue.

Tried 3.3.5-gentoo 3.3.5 3.4.4 and will try 3.4.4-gentoo now.

I have seen loads of other posts on here regarding the same thing, and most get around it by remerging xf86 drivers, or enabling things in the kernel. I have been through that for about 3 days solid now and still i cant see the mouse in /proc/bus/input/devices however it does appear in /dev/bus/input/usb/006/002.

Well I dropped back to kernel 3.2 with exactly the same software setup - no difference in config at all and the mouse works!

Well looks like this is a bug with kernel 3.3+ or something in the kernel which different from the old UHCI/OHCI things which you need to have in there._________________It said "Requires Windows XP or better"
So I installed gentoo.

I was running into this problem to. I ended up solving it by adding support for all the permutations of [OUEX]HCI and "high speed usb2/3 bus support" into my kernel. (Not sure why they were disabled, I must never have noticed them while installing.